What’s really in your EBITDA? 2,021 add-backs


Deep Dive

What’s really in your EBITDA? 2,021 add-backs

Huw Simpson's avatar
Justin Rampersad's avatar
  1. Huw Simpson
  2. +Justin Rampersad
8 min read

The debate surrounding EBITDA’s use as a financial metric is well covered, however it does remain relevant as an industry standard for calculating leverage (among other covenant tests). Add-backs allow greater flexibility for firms - or sponsors - to incur debt, to make restricted payments or permitted investments as well as several other considerations. 

In addition, its use in comparing transaction multiples means attention must still be paid to the term’s evolution, and where varying definitions or add backs cloud the picture for investors. Here we explore a few of the interesting trends and single names throughout 2021.

Our Method

We break out add-backs into the following categories, which together sum to the ‘marketed EBITDA’ figure used by a company for leverage purposes:

A: Clean EBITDA + non cash costs. We define clean EBITDA as the sum of its constituents; net income before interest costs, tax, depreciation and amortization. Non cash costs include (but are not limited to) provisions, share based payments, gains and losses, and unrealized exchange rate changes.
B: Exceptional items typically include M&A costs, fees, ‘non-recurring’ costs, and run-rating of businesses already acquired.
C: Cost synergies include those costs the company expects to save over the stated horizon.
D: More aggressive Profit synergies include the additional profit a company expects to generate over the stated horizon.
E: Finally, Covid related add-backs are those explicitly mentioned, and include costs associated with PPE, lower margins or exceptional logistic costs.

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